China Construction:Railway FAI to reaccelerate

Keqiang has reiterated the need to expand railway financing reform and speed up railway construction in China. According to local media outlets, there will be a 5% YoY increase in 2014 railway FAI, from RMB630b originally planned at the beginning of the year to RMB700b. In our view, railway construction sector valuations are attractive at the moment and offer a buying opportunity that affords investors exposure to China’s long-term urbanization-driven infrastructure construction demand. As the most under-invested transportation infrastructure segment, China’s railways tend to be viewed by the government as a means to shore up the economy in the event of an unexpected slowdown.

Railway financing opening up. As reported in the Chinese press, a RMB200b-300b railway development fund is likely to be approved by China’s State Council in 2014. Financing has long been the bottleneck for China railway construction.

Progress in railway pricing mechanism reform. The NDRC announced Shenhua Baoshen Railway will implement government-guided prices while Huaichi Railway is to adopt market pricing once it begins operations. If these reforms go through, they would mark the first time China has ever implemented market- oriented pricing for railways, a move considered by many to be a prelude